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CHAPTER 4

CHAPTER 4. INCOME TAX WITHHOLDING Developed by Lisa Swallow, CPA CMA MS. Taxable Wages for FIT Withholding Purposes. Wages/Salaries Cash Bonuses Profit sharing Supplemental Wages Severance pay Retroactive increases Vacation Pay How to withhold:

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CHAPTER 4

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  1. CHAPTER 4 INCOME TAX WITHHOLDING Developed by Lisa Swallow, CPA CMA MS

  2. Taxable Wages for FIT Withholding Purposes • Wages/Salaries • Cash • Bonuses • Profit sharing • Supplemental Wages • Severance pay • Retroactive increases • Vacation Pay • How to withhold: • with regular pay (treat as one paycheck and withhold accordingly) • alone - 28% flat supplemental withholding

  3. Fringe Benefits • Non cash fringe benefits • ER must withhold FIT unless specifically excluded • Examples include: • tickets to athletic events • athletic club membership • personal use of corporate car • frequent flier miles • stock options(when option exercised) • Specifically excluded fringe benefits include: • de minimis and working condition fringe • reduced tuition, qualified transportation fringes, meals & lodging if for ER benefit

  4. How to Withhold FIT on Noncash Fringe Benefits • Withhold like supplemental (28%) • With regular pay - treat as one paycheck and withhold accordingly (for example - country club membership valued at $2000/year - can put $500 on 4 paychecks) • For FICA/FIT, ER must withhold on fair market value of benefit > amount employee paid towards benefit • Don’t have to withhold FIT on personal use of corporate car if ER chooses - but must always withhold FICA on personal use of corporate car • Still, the fair market value is on W-2 and EE has to pay FIT at year end • ER must figure value of fringe benefits no later than 1/31

  5. FIT Withholding on Tips • ER receives form 4070 from EE by 10th of each month • ER must withhold based on form 4070 (reported tips) • Employer is not required to withhold on allocated tips (see chapter 3) - only reported tips

  6. FIT Withholding on Tips (continued) • What if taxes withheld > hourly wages to be paid? • For example blackjack dealer reported tips = $2000 for one week; her FIT/FICA withholding will exceed her paycheck • EE gets no paycheck and pays balance with form 1040 or can make quarterly estimated tax payments

  7. What is Exempt from FIT • Ministers • < 18 newspaper carriers • Moving expenses if EE will deduct • Educational assistance if it maintains/improves job status • Travel Reimbursements but only if made under an “accountable plan” • ER has drafted IRC-approved plan; if there is not a plan in place, travel reimbursements are made under a non-accountable plan, considered wages, and therefore ER must withhold FIT

  8. What is Exempt from FIT (continued) • Contributions to deferred compensation plan • 401(k) or SEP or SIMPLE contributions • These are retirement plan contributions that are made pretax for FIT purposes; however, ER must still calculate/withhold/match FICA • Contribution to flex plans or cafeteria plans • Section 125 • These are salary reductions whereby EE puts pretax dollars into a trust account to be used for health care and dependent care; these dollars do not have FIT or FICA withheld on them

  9. How does ER know how much to withhold • Best for EE if FIT withholding = tax liability (goal isno refund and no tax due) • W-4 How many withholding allowances • One allowance for self (if not claimed by other person) • One for each dependent • Special allowances (itemized deduction, other compensation, tax credits, etc. – use worksheet on back of W-4 to calculate)

  10. W-4 • Single or married or “married but tax withheld at higher single rate” box - why would an EE choose this? • Because possibly other sources of taxable income • Exempt status • Can claim if taxpayer had no income tax liability last year and none expected this year • Can’t claim exempt if dependent on someone else’s tax return and earn $700 and have unearned income * never advise employee as to how many allowances to claim*

  11. Other Situations on W-4 • If EE doesn’t provide a completed W-4, ER withholds at single rate, 0 allowances • EE can change, when ER receives new W-4, has 30 days • EE must change within 10 days for decrease in # of allowances • Lose child as an allowance (custody) • Become single • Don’t have to do if lose allowance due to death • Unauthorized changes/additions invalidate W-4 • File in personnel file – only send to IRS if: • EE claims 11+ withholding allowances • Claims exempt and is earning more than $200/week

  12. How does ER find what amount to withhold? • Use Circular E and find correct withholding • Either Wage Bracket (easiest) or • Percentage Method, only use if: • highly compensated or • 10+ allowances or • compensated annually, semiannually or quarterly • Need to know: • Single/married • How often paid • Gross pay • Number of allowances

  13. Examples - Calculating FIT Withholding (#1) FACTS: Annual salary is $16,500 - paid weekly - Single 4 - what is the FIT withholding? • Weekly gross $16,500/52 = $317.31 • Can use wage bracket tables to look up single with 4 allowances • FIT withholding = $7

  14. Examples - Calculating FIT Withholding (#2) FACTS: Annual salary is $84,400 - paid semimonthly - Married 1 - what is the FIT withholding? • Semimonthly gross is $84,400/24 = $3516.67 • Must use Percentage of Withholding tables • To Do: • Subtract (# of allowances x amount from withholding allowances table) from gross: • $3516.67 - (1 x $116.67) = $3400.00 • Look up $3400.00 in appropriate table and write formula: • $262.20 + (3400.00 - 2017.00)(.28) = $649.44 FIT

  15. Examples - Calculating FIT Withholding (#3) FACTS: Monthly salary is $3,000 - paid semimonthly - Single 2 - what is the FIT withholding? • Annualize salary $3000 x 12 = $36,000 • Semimonthly gross $36,000/24 = $1500 • Can use wage bracket tables to look up single with 2 allowances • FIT withholding = $190

  16. Examples - Calculating FIT Withholding (#4) FACTS: Quarterly salary is $4,000 - paid quarterly - Married 3 - what is FIT withholding? • Must use Percentage of Withholding tables • To Do: • Subtract (# of allowances x amount from withholding allowances table) from gross: • $4,000.00 - (3 x 700.00) = $1900.00 • Look up $1900.00 in appropriate table and write formula: • (1900.00 - 1613.00)(.15) = $43.05 FIT

  17. Examples - Calculating FIT Withholding (#5) FACTS: Annual salary is $336,000 - paid monthly - Single 2 - what is FIT withholding? • Monthly gross is $336,000/12 = $28,000.00 • Must use Percentage of Withholding tables • To Do: • Subtract (# of allowances x amount from withholding allowances table) from gross: • $28,000.00 - (2 x 233.33) = $27,533.34 • Look up $27,533.34 in appropriate table and write formula: • $7654.89 + (27,533.34 – 24,163.00)(.396) = $8989.54 FIT

  18. Examples - Calculating FIT Withholding (#6) FACTS: Annual salary is $485,000 - paid semimonthly - Married 4 - what is the FIT withholding? • Semimonthly gross is $485,000/24 = $20,208.33 • Must use Percentage of Withholding tables • To Do: • Subtract (# of allowances x amount from withholding allowances table) from gross: • $20,208.33 - (4 x 116.67) = $19,741.65 • Look up$19,741.65 in appropriate table and write formula: • $3827.38 + (19,741.65 – 12,081.00)(.396) = $6861.00 FIT

  19. FIT Withholding on Other Sorts of Income • Pensions (W-4R) in excess of $14,700 per year • Withhold as if M3 unless complete W-4R to change amount of tax withholding • Third party payer of sick pay (W-4S) • Supplemental Wages

  20. Withholding on Supplemental Wages • Items like vacation pay, retroactive increases and bonuses • Can add to regular wages and utilize wage bracket or % method on total gross or • Can withhold at flat 28% if supplemental wage check issued separately

  21. Earned Income Credit (EIC) • To get reduction in FIT for low income taxpayers • In 2001, qualify for EIC if • 2 qualifying kids and earned income < ????? • 1 qualifying child and earned income < ????? • no kids and earned income < ????? And • investment income does not exceed $2400 • Earned income is tips, wages, self employment income (and no deduction for salary deferral)

  22. Advanced EIC • To get part of this on each paycheck, file W-5 (Earned Income Credit Advance Payment Certificate) • Can only get advanced earned income credit if have kids • The maximum payment is $1412/year • This advanced earned income credit does not change the amount that employers must withhold from employees’ wages • This amount is treated as having been paid to the IRS (on the 941 shows up as a payment) • Can only have 1 certificate on file at a time; if married, both spouses can have a certificate on file • Have to refile each year and have to revoke in 10 days if ineligible

  23. Information Returns • Year end Statements • W-2 to EE by 1/31 and SSA by 2/28 • W-3 • W-2c and W-3c (if correcting) • 250+ W-2s must use magnetic media • 941s must tie to W-3 • 1099-MISC with 1096 as transmittal • 1099-DIV with 1096 as transmittal • 1099-INT with 1096 as transmittal

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